A Retrospective on Digital Disruption

Much has been written about the digitalization of insurance, vast rounds of successful InsurTech funding and the growing clamor to disrupt the insurance industry—particularly as we reach the other side of the pandemic. Regardless of which catchphrase you use to refer to this new state of affairs, it is clear some things aren’t going back to the way they once were. Unfortunately, one thing that hasn’t effectively changed just yet (with a few notable exceptions) is the use of retrospective data, particularly in underwriting and actuarially assessing risk.

Our Current State

Consider the following:

• Now, more than ever, rich data is everywhere.
• Insurers (and reinsurers) are no strangers to data, having used it for 100+ years to run their businesses.
• Many insurers and reinsurers continue to have a risk-averse mindset (for various reasons) and still rely on traditional data and sources rather than some combination of traditional and emerging data. Today, although new data is available that was not present when risk models were initially built, we remain relatively slow to adapt to changes and investigate new schools of thought.
• Many organizations still cling (or succumb) to reviewing and using data with a single, narrow purpose in mind, usually for which it was created, extracted or compiled (health care claims, for example).
• Despite the obvious comfort with data, many organizations still haven’t moved away from the own-and-control mindset. There is, however, at least some movement toward risk sharing and risk management that begs for more cooperation and partnering.
• Cohesive organizational strategies around the analysis and use of different kinds of data leave buyers wanting more.
• Challenging underwriter demographics remain as many are on the “back nine” of their careers, while the breadth of this new data-rich environment adds granularity and sophistication to new models.
• Actuaries, on the other hand, are replenishing their ranks at a meaningful rate (relatively speaking), with new actuaries tending to look at other forms of data in their analyses of various blocks of business.

What We Can Do

Perhaps one way to address this is the concept of dynamic underwriting, sometimes known as continuous underwriting. Whatever you call it, the idea is that the underwriting process leverages technology and various data sources on a continuous basis to assess and insure risk in a more tailored and specific manner—though the underlying risk often doesn’t change.

Nevertheless, changing customer expectations, new digital ecosystems, artificial intelligence (AI) and a variety of other innovations slowly are shifting the underwriting landscape beneath our feet. But in general, we don’t feel it quite yet.

To remain competitive, especially when targeting certain demographics and areas, this underwriting transformation must accelerate much more quickly than it has thus far. Actuaries, underwriters and others with technical and industry expertise are well-positioned to lead this transformation, as data is their food.

This is particularly valuable as the industry—and the government—consider insuring things that historically have been deemed uninsurable (like pandemics). Data and its proper use will be key. Additionally, the skills, abilities and experience don’t all have to be applied to just these types of risks. They also can be applied to more common risk calculations in health care, property and casualty, personal lines and other areas.

What We Need From Future Underwriters

Of course, all this is hard to accomplish without good underwriters who understand the domain and lend their deep expertise to these broader application efforts. Hence, in the future, it is likely that the future risk assessor (underwriter) will look a little different than the underwriters of the past.

In my view, this future state is destined to move away from the relatively narrow focus of traditional underwriters and underwriting methods and models into one where the new “prototypical” underwriter represents a combination of someone who operates in a more strategic way—rather than the typical scenario today, where deals are evaluated one by one (based on the limited data sets submitted), and quotes are simply churned out one after the other. In my opinion, future risk assessors will need to understand strategy, technology, operations, pricing and so on, and, in general, be much more well-rounded and deeply informed than they are today.

What We Need From Future Actuaries

The same underwriter truth also can be applied to actuaries. That is, all of this is hard to accomplish without actuaries who understand their respective domains and, at the same time, lend their risk-assessing expertise (especially in the aggregate) to others of their ilk.

A few years ago, any actuary facing this would have done what every actuary did at the time—research by (insert search engine of choice). Then came the prospect and availability of attending conferences to learn more about these new things called “InsurTechs.”

Now, a few years later, more and more actuaries are getting comfortable with the prospect of looking at new forms of data as part of their risk assessment work. In fact, we might even refer to this as a more holistic form of risk management.

Admittedly, it is—and will be—hard to do more holistic risk management without knowledgeable actuaries who understand the newer, more emergent forms of risk and risk protection, especially in areas like climate, cyber, embedded insurance, usage-based insurance and others. As insurers (and InsurTechs) venture into more dynamic and emergent forms of risk and risk protection, it will be incumbent on actuaries to not just come along for the ride, so to speak. They will need to lend their considerable skills to the prudent management of that risk and do so with the calculation of a fair price for it.

As with underwriters, actuaries need to be much more well-rounded and deeply informed than they are today. Luckily, actuaries are up to the task and already are demonstrating their growth in understanding and pricing via initial forays into usage-based insurance. More specifically, as real-time data comes streaming into platforms from various sources, it is actuaries who are responsible for connecting all these digital dots to actual policyholders and, in the aggregate, entire blocks of the insurance business. This, of course, transcends insurance segments because just as cars will be able to talk to each other and transmit real-time data (affecting property and casualty insurance), so too will other wearables (affecting life, health accident and medical, or LHAM).

Conclusion

Many are amazed by how fundamentally risk-averse the supposed risk-takers of the world actually are. Although there are many reasons for this—and some of them are wise—the reality in today’s operating environment is that the world has moved on from that mindset.

It behooves risk-takers everywhere to reexamine their environments, desires, competitive threats and capabilities and delete their old ways of thinking, choosing instead to better understand and use emerging technologies without fear of failure. As it stands today, only a small portion of total risk is actually insured. Hence, opportunity abounds.

In summary, it will take various steps to move the industry meaningfully forward and make clients feel like they are not increasingly (and perhaps unnecessarily) exposed to more complicated types of risk. To provide clients with the reassurance and needed peace of mind insurance brings, the insurance industry will need a new mindset supported by better use of emerging technologies, along with a risk appetite that also is correspondingly real. Token measures won’t get the job done anymore.

More well-rounded actuaries and underwriters will help speed the process along. Perhaps the biggest accelerator, though, will be a greater and more fundamental understanding of global trends, identification of sustainable innovations and the ability to use data to generate better and more meaningful insights that keep up—and predict what’s next—in a fast-changing world. Where sensible, partnerships can help do that, too.

To close, one expression that particularly resonates with the risk-takers of the world is the phrase coined by W. Edwards Deming: “In God we trust. All others must bring data.” Well, we now have it—in spades. What are you going to do with it?

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Copyright © 2022 by the Society of Actuaries, Chicago, Illinois.